Quick Overview
- Derecho’s Impact on Corn: The 2020 derecho damaged over 1 million acres of corn, leading to a temporary price rally.
- South American Influence: Drought in Brazil and Argentina reduced corn production, increasing global demand for US corn.
- China’s Buying Spree: China’s massive corn imports (350% increase) were a crucial factor in the market rally, overshadowing the derecho’s impact.
- USDA Conspiracy Debunked: The USDA‘s claim that it overestimated the 2019 corn crop was unfounded; empty bins were normal for the season.
- Future Market Triggers: Potential price rallies could stem from low yields, renewed Chinese demand, or adverse weather conditions.
As the fourth anniversary of the infamous derecho approaches, it’s hard not to reflect on the impact this powerful storm had on the landscape of Iowa and Illinois and the corn market. The derecho, which barreled through the Corn Belt in August 2020, was indeed a meteorological spectacle, dubbed the worst thunderstorm in US history. It uprooted trees, flattened crops, and tore apart storage bins, leaving behind a trail of destruction. The storm didn’t just disrupt the physical landscape and sent ripples through the corn market, sparking a rally that few anticipated. Yet, as time has passed, some analysts believe the 2020 derecho’s impact on the market was somewhat exaggerated. Let’s dive into the storm’s aftermath and explore whether the market’s reaction was indeed warranted.
How Much Corn Was Lost?
The 2020 derecho was widely reported to have damaged or destroyed over 1 million acres of corn. At first glance, this seemed catastrophic, particularly considering that these acres could have produced an average of 200 bushels per acre. This would translate to a significant drop in the expected carryout—a 200 million bushel reduction, which represents just under a 10% decrease. Historically, the relationship between carryout levels and corn prices is well established. A carryout of around 1 billion bushels often triggers corn rationing and pushes prices to $8 per bushel, while a 2-billion-bushel carryout typically signals ample supply, leading to prices closer to $4 per bushel.
Given this context, the market’s reaction was predictable. Corn prices rallied from $3.20 to $4.00 as the harvest progressed, reflecting the estimated reduction in carryout from 2.2 billion bushels pre-derecho to 2 billion bushels after the storm. This 80-cent increase aligned with what historical trends suggested, but was the rally solely due to the derecho? The answer might be more complex than it first appears.
South America’s Silent Struggle
While the US corn market was grappling with the immediate effects of the derecho, another quieter but equally significant issue was unfolding thousands of miles away in South America. Brazil and Argentina experienced dry weather conditions from January to March 2021, severely impacting their corn production. These two major corn exporters produced 750 million fewer bushels than the previous year. This reduction put additional pressure on the global corn supply, particularly on US exports, as buyers turned to the US to fill the gap left by South America.
The increase in global demand, particularly from countries that usually rely on South American corn, was crucial in driving US corn prices. The market saw a year-over-year export increase of around 1 billion bushels for the 2020/21 marketing year. More than the derecho’s impact, this surge in demand is the true catalyst behind the sustained rally in corn prices during that period.
The China Factor: A Game Changer
China’s unprecedented buying spree added another layer to the 2020 corn market puzzle. Between September 2020 and August 2021, China imported 350% more corn than in the previous marketing year. Historically, China had never purchased more than 320 million corn in a year. Still, in 2020/21, they bought over 1.12 billion bushels—more significant than their total corn imports combined over the previous seven years.
This massive uptick in demand from China sent corn prices soaring, arguably more than the derecho or South American production issues. China’s buying spree was a pivotal moment that reshaped the global corn market and significantly influenced the following price rally. The sheer scale of their purchases dwarfed the impact of the derecho, suggesting that the market’s reaction to the storm may indeed have been overblown.
The Myth of Empty Bins: Debunking the USDA Conspiracy
In the wake of the derecho, there was much speculation about the state of the 2019 corn crop. Some argued that the numerous empty bins destroyed by the storm proved that the USDA had overestimated the previous year’s crop size. However, this theory doesn’t hold up under scrutiny. By mid-August, when the derecho hit, most of the 2019 corn would have already been sold or consumed, with only about one-twelfth of the crop still in storage. Additionally, corn storage is not evenly distributed across the Corn Belt; northern states like Minnesota and the Dakotas tend to have more corn in storage later in the season compared to central Iowa, where the derecho did the most damage.
Furthermore, the storm’s timing—just a month before the new harvest—meant that commercial elevators were likely near empty, preparing to receive the upcoming crop. The presence of empty bins does not necessarily indicate miscalculation by the USDA but instead reflects normal market operations and storage practices at that time of year.
What Could Trigger Another Rally?
As we look towards the future, the question on everyone’s mind is whether the corn market could rally again to the heights seen in 2020. A few factors could potentially spark another price surge. For instance, if the average national yield falls below 179 bushels per acre, prices rise to between $4.30 and $4.50. However, current USDA estimates suggest that yields are likely higher, around 182 bushels per acre.
Another potential trigger could be renewed aggressive buying from China. While China’s corn imports have slowed since 2021, any unexpected surge in demand could push prices higher again. Reducing planted acres to prevent plants or an early frost from damaging late-planted crops could also put upward pressure on prices. However, without these or other significant disruptions, the market might remain subdued, with prices possibly dipping further into the $3 range.
Was the Derecho a Turning Point, or Just a Chapter?
Reflecting on the 2020 derecho and its aftermath, it’s clear that while the storm was a significant event, it was not the sole driver of the following corn market rally. A combination of factors, including South American production issues and China’s unexpected buying spree, played equal, if not more, critical roles. The market’s reaction to the derecho may have been somewhat overblown, but it was just one piece of a much larger puzzle in the context of the broader global market dynamics.
As we mark the anniversary of this historic storm, it’s a reminder that markets are often influenced by a confluence of events rather than a single factor. The derecho might have been a turning point. Still, the subsequent surprises—drought in South America and a buying frenzy in China—genuinely defined the market’s trajectory in the years that followed. Whether we will see another rally of similar magnitude remains uncertain. Still, as history has shown, the only certainty in the unpredictability of the market is unpredictability.
